A Blueprint for Great Financial Health

Next to good physical health, comes an equally good financial health – to lead a great life. Most of us make a lot of money but have a poor personal finance situation. I am not special and I have been through the same rut, a few years back. Using some “common sense” approach, I managed to get things back on track. That’s what I will be sharing with you in this post.

This is not a get-rich-quick post. Neither this is a guide if you are in dire straits. It is for you – if you are making reasonable amount of money but struggling to make ends meet. Others, please ignore this post and find some means to earn money!

Habit #1 : Save before you Spend

Please ingrain this idea into your mind. Save before you spend!

The point is not how much you save. But it is that “you save”.

Most modern banks enable you to do the following:

Create a Savings Account linked to your Main Account

Automatically transfer an amount of money, every month, into your Savings Account

Please make use of these facilities. Choose an amount of your choice and put the transfer on Auto Pilot. I recommend you to start with a small amount – say $100 – but make it systematic.

Habit #2 : Treat your Savings Account like a Locker

How do you use a Locker?

If you are like me, you use it for valuable stuff. You put things in there and forget about it (of course, transferring risk to the bank).

Treat your Savings Account the same way. Any money that goes in must come out only for a specific purpose.

Here are some examples of “good specific purposes”:

Yearly Health Insurance

Emergency Needs (hospitalization etc.)

Dream Travel

Education

Repayment of Loans

And, here are some “bad specific purposes”:

Buying that expensive gadget, even if you don’t really need it

Splurging on yourself

Investing into any depreciating asset (cars etc.)

Habit #3 : Use Credit Cards to complement Purchases, not to Overspend

Let me explain this with an example.

You are planning a dream trip. One fine day, you notice that the tickets are so damn cheap. But you don’t have enough money to buy the tickets. However, the money will come as part of your next month payroll – which you have already budgeted for the travel.

This is a classic example to buy them with your credit card. Even better, use a credit card that can give you reward points or cashback offers.

In the same example, if you don’t know when the money will come to payoff the credit card debt – just stop buying it and do it when you can afford.

Habit #4 : Don’t ignore the Budget and Use a Good Budgeting Tool

At any point in time, I know how much more money I can spend on Restaurants, for the rest of this month. I also know that if I have to spend more on Restaurants, where I need to make a cut.

As a responsible adult, you should be able to do this. It puts you into great command over your personal finance situation. It helps you make right decisions when it comes to money and not rely on “gut feeling”.

As a corollary, use a good tool to manage your budget.

A spreadsheet is good if it serves your purpose. Otherwise there are numerous paid and free solutions over the internet. My favorite is YNAB (You Need A Budget) and I use it extensively.

Habit #5 : Defer your Buying decisions until the last possible moment

There are wonderful marketing folks all around us. Many advertisements, offers and sales pages do a great job of enticing you and make the sale happen.

Never make buying decisions based on instincts.

I use the 10-10-10 technique before making a significant decision and it works great for me.

When confronted with a decision, ask these questions to yourself:

Will the product or service be useful to me in 10 days?

Will the product or service be useful to me in 10 months?

Will the product or service be useful to me in 10 years?

If your answer is Yes to all of these, go ahead and make the purchase.

If your answer is Yes to first two and not the third one, evaluate various options before making the purchase.

If your answer is Yes only to the first question, renting or borrowing might be a better option.

If your answer is No to all questions, you know it now!

Habit #6 : Wisely pay off your Loans

Unless you are clear of any loans, at least not paying the interest, savings don’t make a lot of sense.

Not all loans are bad. Educational loans are an example of “good” loans. Bad loan is something that you take for buying a depreciating asset (like a car or gadgets).

Once you take a loan, weigh the following decisions: Paying off the loan faster versus Going with the loan schedule.

Here is an useful technique.

Look at your loan amortization schedule, that is, the instalment you would be paying and the corresponding principal and interest balances. Also calculate the overall interest you would pay on the loan. Now compare this with faster repayment and investing the rest of your instalment. Go for the option that gives you better returns.

But remember: Paying off faster is not always the best option.

Let’s recap the 6 habits

Don’t spend a dime before you save. Choose an amount that works for you and stick to it

Treat Savings Account like your Locker. Take money out of it only when absolutely necessary